The Illusion of Change: Balancing Community and Financial Incentives
Last week, we examined the evolving trends within the cryptocurrency landscape.
This week, we focus on the implications of these changes, particularly the recent transformation in token distribution strategies.
Community-led token launches have experienced a resurgence, challenging the traditional model dominated by institutional investors.
To analyze this shift, we evaluate recent trends, including the cases of Hyperliquid and Echo, and assess community sentiment and the market outcomes associated with different token distribution approaches.
Community-Led Token Distributions as the New Meta
In recent months, there has been a notable resurgence of community-driven fundraising initiatives.
This trend appears to be influenced by several key factors:
1. Market Sentiment Towards Community Raises
Tokens launched under the previous VC-dominated paradigm frequently exhibited underwhelming post-launch performance.
The combination of low float, skewed token distribution, and structured vesting schedules often resulted in persistent downward price trajectories. As a consequence, market sentiment is shifting in favor of community-led launches.
This shift has been significantly impacted by Hyperliquid, which demonstrated that a well-developed product, combined with a carefully cultivated community, can mitigate reliance on VC funding while preventing the typical post-launch token devaluation.
The growing number of new token launches also highlights the necessity for projects to distinguish themselves, with community involvement emerging as a critical differentiator. As a result, the "fair launch" narrative has regained prominence.
This also presents an advantage for retail investors, granting them access to investment opportunities previously reserved for institutional players. In some instances, community-led approaches allow retail participants to acquire tokens at more favorable valuations than traditional investors.
2. The VC-backing Dilemma
Users are increasingly skeptical of projects that allocate most of their token supply to VCs and other investors. This raises a dilemma for project teams: securing necessary funding while maintaining equitable distribution.
While placing great emphasis on democratic participation, founders often face a more practical dilemma: securing enough funds to ship their products.
Community-driven distribution models offer a fairer allocation mechanism, yet they introduce uncertainties regarding financial stability and strategic investor support.
Nevertheless, these models provide distinct advantages:
Allowing projects to bootstrap a dedicated user base
Facilitating iterative product testing
Enabling a focus on long-term value creation rather than short-term investor-driven priorities.
A cap table and token supply structure disproportionately controlled by institutional investors often leads to misalignment between short-term price fluctuations and the project's long-term strategic vision. This is frequently expressed through vesting schedules and token unlock mechanisms, negatively impacting tokenomic dynamics.
Furthermore, excessive institutional control leaves minimal influence on retail participants in governance and long-term project development. This lack of agency may ultimately undermine community engagement and result in a loss of interest and mindshare.
Common Pain Points
Preferential Treatment: Early investors and advisors often receive more favorable token terms and access than general community members, leading to inequitable advantages.
Limited Governance Influence: Despite claims of community ownership, retail token holders frequently lack influence over decision-making processes.
Disparities in Strategic Focus: Project teams prioritize long-term development, yet short-term trading sentiment largely dictates token price fluctuations.
Community Preferences: What Do Users Prioritize?
Discussions across social media platforms, alongside the rising popularity of platforms like Echo indicate that cryptocurrency users are growing discontent with the preferred treatment of VC and institutional investors.
The demand for a more equitable investment landscape is intensifying.
Key Community Expectations
Equal Buying Opportunities: The community seeks investment conditions comparable to those offered to VCs, including fair token pricing and simplified participation mechanisms.
Transparent Tokenomics: Clear token distribution models are essential to ensuring investor confidence.
Inclusive Entry Mechanisms: Investment should not be restricted to high-net-worth individuals ("whales"), and access should be distributed equitably.
Diverse Participation Methods: Whether contributing liquidity, engaging in platform development, or purchasing tokens, users should have multiple avenues to participate.
Structural Considerations
Predictable Token Unlock Mechanisms: Clearly defined unlock schedules help mitigate market volatility and prevent unexpected token sell-offs by insiders.
Balanced Governance Systems: While larger token holders inevitably have more influence, delegated voting and time-based governance models can empower smaller investors.
Transparent Reward Structures: Projects should establish clear frameworks for value distribution to holders, whether through staking incentives, buybacks, or revenue-sharing mechanisms.
Community-Centric Development: Regular engagement, transparent governance, and funding mechanisms for community-driven initiatives are essential for sustaining long-term participation.
Changing Trends: Implications for the Market
As projects embrace community-first approaches, several key trends have emerged:
Innovative Token Launch Mechanisms
Communities Getting Real Power: Projects are moving beyond symbolic governance to give token holders actual influence over protocol changes, fund allocation, and strategic decisions. This includes weighted voting systems and direct control over treasury funds.
Creative Ways to Reward Participation: More projects are experimenting with dynamic staking rewards, contribution-based token distributions, and reputation systems that reward consistent involvement rather than just token holdings.
Token Systems Built for the Long Run: Focus on creating sustainable tokenomics with built-in mechanisms to maintain value, like dynamic supply adjustments, buyback systems triggered by usage, and incentives aligned with protocol growth.
Less Dependence on VC Money: Projects are exploring alternative funding models like community raises, protocol-owned liquidity, and revenue-based growth that reduce the need for significant upfront VC investments.
Key Challenges for Projects
Balancing Funding vs Control: Teams need to work out how to raise enough capital to build and grow while ensuring the community maintains meaningful ownership and influence. Hybrid funding models may be required to address this balance.
Real Community Growth: Sustainable growth requires moving beyond short-term incentives toward fostering long-term engagement through education, shared objectives, and genuine value creation. This includes ambassador programs, developer grants, and community-led marketing.
Transparency as a Standard: Regular project updates, open governance discussions, and clear communication are no longer optional—they are critical expectations.
Sustainable Revenue Model: Developing ways to generate consistent revenue that benefits both the protocol and token holders, whether through fees, services, or other value-generating activities that can support long-term development.
Case Study: Hyperliquid's No-VC Approach
The remarkable success of Hyperliquid's token post-distribution offers a compelling case study in rejecting traditional VC funding:
No VC Allocation: Tokens were distributed exclusively to platform users.
Sustained Market Performance: The token exhibited strong post-distribution price stability.
Organic Community Development: The project’s growth was driven by genuine user engagement rather than artificial incentives.
Merit-Based Distribution: Allocation was based on users' platform activity and contributions.
However, several unique aspects of Hyperliquid’s user base distinguish it from other projects attempting a similar approach, making it a potentially misleading example for other projects considering community-driven approaches:
Heavy-Hitting Traders: The core users aren't typical retail investors; we're talking about serious traders who regularly move significant volumes.
Long-term Holding Power: These users have enough capital to sit on their tokens without needing quick returns, reducing selling pressure and fostering long-term holding behaviour.
Natural Platform Alignment: Since they're active traders making good money on the platform, they benefit from its success anyway, and the tokens are just extra.
Less Sell Pressure: When you're already profitable from trading, you're not itching to flip tokens for quick gains
Not About the Money: Unlike most projects scrambling for development funds, Hyperliquid wasn't looking to fill their treasury
Pure Usage Rewards: Tokens went to people using the platform, not those buying into a promise
Different Mental Game: When you earn tokens rather than buy them, you think differently about holding vs selling
While HyperLiquid's approach worked great for them, other projects must realize their communities might look very different. What works for a platform with many wealthy, experienced traders might not work for one aimed at regular retail users.
This raises an uncomfortable question: Are community raises truly more sustainable, or do they simply shift selling pressure from VCs to retail investors who might be even more desperate for quick returns? While VCs might employ calculated exit strategies, retail investors in community raises often lack the financial cushion to think long-term, potentially creating more erratic and emotional market movements.
Last but not least, while Hyperliquid distributed over 31% of its tokens, it focused on building a product that users enjoyed spending time on.
This should be used as an example: community alone is not gonna save your project if it doesn’t stand alone on a strong foundation (e.g. an excellent product)
Key Differences Between the Approaches
While the crypto community celebrates the shift from VC-dominated raises to community-driven models, an uncomfortable truth emerges: human nature remains constant.
The key differences between these distribution approaches lie in the following:
Democratizing Access to Investment Opportunities
The emergence of platforms such as Echo and Legion has further contributed to opening up investment opportunities traditionally reserved for VCs and institutional investors to the broader retail audience.
Furthermore, these platforms provide a streamlined interface for protocols to carry out investment rounds, making it much easier for them to refine their strategies further when allocating tokens.
The tides are changing, and these developments are already impacting how new projects rethink their token distributions. Notably, we are seeing a higher and higher % conducting their token sales on these platforms, including MegaETH recently.
This results in more balanced stakeholder interests and cap tables where community funds continue to increase their allocation.
The Echo and Legion Approach:
Focus on community-driven development
Transparent tokenomics
Balanced stakeholder interests
Innovation in distribution mechanisms
When it comes to token distribution and investment allocation, there is no secret sauce.
However, projects can consider a few new factors based on the current developments.
Recommendations for Future Projects
https://x.com/Grantblocmates/status/1887025202846163192
Future projects looking to innovate their distribution model should take into account:
1. Distribution Strategy
Implementing fair and transparent community sale mechanisms
Creating precise alignment between token holders and project success
Developing innovative approaches to project funding
Ensuring the broad distribution of governance rights
2. Community Engagement
Establishing transparent communication channels
Building community consensus around distribution mechanisms
Maintaining long-term engagement
Creating meaningful utility for token holders
Allowing the community to have an impact on the long-term direction of the project
Who Wins and Loses in Different Token Models?
The Interesting Part: Mixed Model Reality
When VCs and Community mix:
VCs get: Smaller share, better image
Projects get: More supporters, complex management
Community gets: Better stability, smaller allocations
The rightness of a model, whether it is more inclined towards investors or community, is not an absolute value. It always depends on the subject's point of view and, above all, of the market.
Conclusion and Food for Thought
The trend toward community raises represents a significant shift away from traditional VC-dominated models. Projects increasingly recognize the importance of aligning with community interests rather than catering to large institutional investors. Success in this evolving landscape will likely depend on creating distribution mechanisms prioritizing community ownership while ensuring project sustainability.
While there is no secret receipt, the emergence of new elements has to be considered by projects looking to have a successful launch.
We are currently in a middle ground between both, where projects are trying to replicate the Hyperliquid model with different results. On the one hand, they are trying their best to show a willingness to distribute a higher percentage of their token supply to the community. On the other hand, unfortunately, they have pre-existing investor ties, which limits their freedom on the matter.
At the same time, the involvement of community participation does not ensure long-term success or incentive alignment.
Retail investors are just as likely (if not more) to be profit-oriented and short-term-sighted concerning their handling of tokens received. Furthermore, their exit strategies are also less sophisticated than those of traditional investors, potentially having a higher impact on price action.
However, achieving a balance is possible, provided that you consider these aspects from inception. Just like blockchain tech, the distribution model of projects adapts with time.
Unfortunately, they are not evolving as fast as we would hope.
Nonetheless, there’s still hope as we witness the revival of community-led models.
The next few months will be fundamental to observe and assess this trend: will the community be guaranteed fair access to investments, or will it just be upheld as a marketing strategy, with little to no changes to previous antics?
Can we just get it right this time, please?